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The key to investing success starts with having the right mindset.
Steven Pesavento, president of VonFinch Capital, joins the show to discuss how living with “The Investor Mindset” can help investors generate more wealth.
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- How living with “The Investor Mindset” and naming your number can help High Net Worth investors grow their wealth more effectively.
- The most common roadblocks to achieving the investor mindset.
- Steven’s favorite asset classes for investing for passive income — including multifamily, oil & gas, and debt.
- The oil & gas industry — why it will continue to be essential in our economy for the foreseeable future, and VonFinch Capital’s foray into the space.
- The impact of the current macroeconomic environment on strategy for High Net Worth investors, and trends for investors to keep an eye on.
Featured On Today’s Episode
Guest: Steven Pesavento, VonFinch Capital
- Steven Pesavento on LinkedIn
- Steven Pesavento on Instagram
- VonFinch Capital
- The Investor Mindset Podcast
About The Opportunity Zones & Private Equity Show
Hosted by OpportunityDb and WealthChannel founder Jimmy Atkinson, The Opportunity Zones & Private Equity Show features guest interviews from fund managers, advisors, policymakers, tax professionals, and other foremost experts in Opportunity Zones and the broader private equity landscape.
Jimmy: Welcome to “The Opportunity Zones & Private Equity Show.” I’m Jimmy Atkinson, and my guest today helps successful professionals create the life they desire by creating a plan to acquire assets that generate passive income. It’s a big topic that we’ve been discussing here at OpportunityDb and WealthChannel over the last several months, is growing wealth with passive Income. He is Steven Pesavento, President of VonFinch Capital, and host of “The Investor Mindset Podcast,” and he joins us today from Denver, Colorado. Steven, great to meet you, and thanks for coming on the show. How you doing?
Steven: Jimmy, so good to be here. Love what you’re doing, and really excited to be on the show.
Jimmy: Awesome. Well, let’s dive in, Steven. Excited to have a conversation with you today. To start us off, why don’t you tell me a little bit about yourself and the path you took over the course of your career to get you where you are today, and what you do at VonFinch Capital?
Steven: Yeah. So, you know, my story begins, you know, I grew up with a challenging childhood. You know, like many people, grew up in a working-class family, didn’t have a lot of money, and money was the biggest topic of conversation, and there was always anger around it. There was always fighting. And so, I became obsessed in an early age with understanding money and understanding how to think differently, how to really live with the investor mindset, how to understand how to not only make money, but keep it, and then actually turn that into assets that continue to pay me forever. So, been on this journey. You know, when I was a kid, I wanted to either be a chef like Emeril Lagasse or I wanted to renovate houses like Bob Vila, and eventually all that HGTV paid off. I got into real estate back in 2014, full-time since 2016.
And VonFinch Capital’s been operating, you know, we’ve flipped over 200 houses. We’ve bought, you know, over $150 million of commercial real estate. We focus primarily on renovating and redeveloping multi-family in Denver and Dallas and a couple other markets across the country. We’re really, really good at finding deep discounts, and being able to execute big construction plans. But at the core of what we really do is we’re really focused on helping people generate wealth and create passive income. And the reason that that’s been so important is because personally, myself, I spent a decade building a business, and everything was focused on the exit. Everything was focused on net worth. I was rich on paper, but I was broke in the bank, like most real estate investors are, especially when you’re focused on redevelopment, especially when you’re focused on that exit.
And so, you know, the investor mindset really led me to understanding this concept called naming your number, and really understanding how do you create passive income to create that dream life. And so, we help our clients do that. You know, we’re investing not only into multi-family, and we have debt opportunities. We’ve also been in the process of acquiring an oil and gas operator for about the last year, and we’re excited to be able to offer that to our investors as well in the coming months.
Jimmy: Fantastic. A lot to unpack. I wanna ask you about that oil and gas operator you’re acquiring, and dive in more to VonFinch Capital, your platform that you have there, and the name-your-number process in a minute. But first, hey, Emeril Lagasse, an influence on you from a young age. You have a nice…
Jimmy: Exactly. Bam. I remember that guy. You got a nice kitchen, I hope?
Steven: I do. I love cooking. I’m passionate about it. I worked in kitchens from 14 till 21, and I’ll never work in a commercial kitchen unless I own it. But I learned a lot of things about what I love, and I got a true inspiration towards getting the heck out of any kind of working-class lifestyle, after experiencing what it’s like, not only to work on job sites, framing houses, growing up with a stepdad who framed houses, and was pretty rough-and-tumble. The kind of thing that you’re hanging out with people who have criminal records, and drive Harleys and tattoos, and then working in kitchens, you see all kinds of things. And, you know, I still love cooking, but I’m just as happy to go out to eat and let somebody else do all the work.
Jimmy: Very good. Well, a lot of what you do, Steven, is geared around helping your clients and your investors grow their wealth with passive income. So, maybe a rather simple, maybe even a dumb question, but why do people like passive income so much?
Steven: Well, I think the reason people like passive income, and it’s a word that’s thrown around a lot, so let me give a definition to it. Passive income is income that you earn, that once you write the check, you do little to no work or effort after. So, a lot of people that I talk to, are getting started. They say, “Hey, I’ve got a couple rental properties. I have a passive income.” And I usually tell them, hey, that’s cute. But it’s not truly passive. It’s maybe semi-passive at best. And so the reason people like passive income, the reason it’s so important, and the reason that I think it’s vital for folks to be focused on getting assets into their portfolio that are actually paying them every month or quarter, is that unless you’ve got that income coming in passively, then you’re not really financially free.
If you got a business that’s earning you a million dollars a year, and it’s phenomenal, most of the time, when I’m talking to entrepreneurs, they’re still pretty active in that business. And I’ve personally experienced, you know, the loss of a loved one. I lost my sister in a car accident about three or four years ago, and to be honest, when that happened, I was running a business where I was making a lot of money, but it knocked me off my foundation. It put me into a position where, you know, I wasn’t actively running my business, and things started to crumble.
And fortunately, I was able to get back on that foundation and keep moving forward. But the truth is, unexpected things happen to people every day. And so you can’t be reliant on what you have to do and what you have to put in in order to make sure that you and your family and your legacy is taken care of. And the only way to do that is to invest intelligently, and to create passive income so that you truly know that you’re set.
Jimmy: Yeah. Oftentimes, a business, as an entrepreneur, I’m an entrepreneur myself, your business is certainly nowhere near passive. It’s more of a job, really. Like, you, your business can become just a job for you. Eventually, the goal is to scale the business beyond just you, the founder, the entrepreneur, and have it be a little bit more systematized and passive. But, yeah, totally understand. When you leave, Steven, your business kind of falls apart, and then when I leave, I think my business kind of falls apart too.
And then, getting back to the passive versus active, yeah, you own a couple of properties that you’re maintaining or managing, and you gotta deal with tenants and trash and toilets, right? That’s far from passive. Semi-passive, but I think the types of passive investments you’re thinking of are along the lines of being an LP in a real estate fund, or, you know, for a stock investor, maybe just holding a portfolio of dividend stocks, something to that effect. But we’re probably gonna be focusing on real estate mostly for this podcast. But those are what we talk about. Those are what we mean when we talk about passive income, are, you just write a check, and then you kind of more or less forget about it, and the income just kind of comes into your mailbox once a month or once a quarter, just like that.
Steven: And the true benefit is that when you’re investing in private equity, and I’m defining private equity as any non-publicly-traded business or investment that you’re investing into is private equity. And when you’re investing in private equity, the benefit that you get by investing into these private placement deals is that these operators, these business owners, they’ve got insider knowledge and insider access to insider deals. And insider information leads you to being able to not only create a much better and bigger return, not only to decrease your risk profile when you invest with the right people, but it puts you in a position to take advantage of that insider information.
Because when you’re investing in the stock market, even if you’re one of the biggest hedge funds and you’ve got information, you’re making those trades that are going on, you’re legally not allowed to know information about those projects or those businesses that other people don’t know, and make decisions on your investment around that. But when it comes to private equity, private equity real estate, oil and gas businesses, any of the like, it is not only legal, but it’s expected that you’re gonna know what’s going on within that microcosm of that business that ends up leading you to having a lower risk profile and a better return. And so that’s why I like private equity. That’s why I invest primarily in private equity, and, you know, happen to…real estate’s our primary focus, but it’s true across the board, regardless of what type of private equity you’re looking at.
Jimmy: Yeah. I might say, with private equity, compared to a publicly-traded stock market, let’s say, there’s much more information asymmetry within private equity, and the market’s less efficient, and with a less efficient market, and with information asymmetry, there comes opportunities for those who have information that others may not. It’s just more likely you’re gonna come by something like that within private equity than you will within the stock market, within something that’s publicly-traded, and there’s so much information, so much transparency, right? Talk to us about the investor mindset. You mentioned that a couple of times already, and it’s the name of your podcast as well. What do you mean by the investor mindset? What is it, and how does it help your clients?
Steven: Yeah. So, living with the investor mindset is the opposite of the traditional mindset that we’ve all learned and grown up with. Traditional mindset is go to school, get a job, work for a 401(k) and a gold watch, and hope that somebody else, your financial advisor, is gonna take care of you. The investor mindset is taking back control of your financial future. It’s gaining the skills, the knowledge, and the confidence to be able to go out and buy assets, and be able to make intelligent decisions on your investment portfolio that’s gonna actually not only pay you passive income, but also gonna be able to much more rapidly and with less risk grow your wealth.
And so, if you’re gonna live with the investor mindset, there’s seven rules for it. I’ll share one of them. And one of them is you really need to understand what do you want and why do you want it? I call this the dream life vision. What are you really going for? What’s your life really about? What’s important to you? And some of those things that you can figure out is, you know, what kind of emotions do you wanna live with every day? What do you wanna be doing on a daily basis? How do you wanna feel? What does your family wanna feel? How do you wanna live your life? Do you want to be working super hard in your business, your job, working on your mission? Amazing. Do you wanna be spending time with your family, coaching their sports games, or doing travel, or being more present? That’s amazing as well.
Your dream life vision comes down to understanding what do you want, and why do you want it? And then being able to take that and make investment decisions that drive you closer to that point. So, when you’re living with the investor mindset, you’re thinking to yourself, “Every dollar that I earn has purpose. And that purpose of those dollars I earn is to invest in assets that continue to grow, that continue to pay me income, and I use that income from those assets to actually pay for my life and lifestyle,” rather than the traditional mindset, which is bust your butt in work, and then hopefully, at the end of the day, have a little bit of money saved up for your retirement.
Jimmy: Yeah. Bust your hump, work, pay your bills, retire, and then die, pretty much, right? And one thing you said is every dollar you earn has a purpose. That’s totally different mindset than I think a lot of other people have, or that, I don’t know, maybe some people don’t think of it that way. What are some of the places where your clients get stuck the most on this process? Or what are some roadblocks before they can have this investor mindset?
Steven: Yeah. I think one of the roadblocks is that mindset is simply, if I define it, it’s simply your thoughts and beliefs that directly lead to the actions you take and the outcomes you experience. And where do these thoughts and beliefs come from? They come from growing up, they come from your parents, they come from your life experiences. And so, one of the biggest challenges that people have when they’re changing, when they’re changing those thoughts and beliefs from thinking in the traditional world to thinking that of an investor, is getting over the fact that they’re comfortable in what they know today. The known is what they’re living. Their current beliefs and thoughts is based on their experiences.
And so, in order to go and move from the traditional to the investor mindset, you’ve got to go into the unknown. You’ve got to get uncomfortable. You’ve got to go find other experts, build a team, start learning the skills and knowledge from those people, start modeling their success, being around them, and being open to being in that unknown. Because only by stepping into the unknown, stepping out of the place that you’re at today, can you actually start to build that comfort with that new way of thinking until it becomes a habit. And then you look back and you think, “Well, why did I ever think that in the first place anyways?”
But it’s a period of transition that has to happen, going from, I’m comfortable investing in the stock market with my financial advisor, who only knows that world, because that’s what I’ve come to know. And so when you step out into private equity, into alternative investments, into living from that investor mindset to go buy assets that pay you, you’ve got to go a little bit in the unknown, and I’m not suggesting that you should just immediately run out and put a million dollars into a fund with somebody because you heard ’em talk on a show. But what you need to do is you need to gain the skills and knowledge, and build the right team, so that you know, and you’re comfortable and confident that when you go and pull the trigger to make that investment, that you’ve got that comfort level and you’re living from that new place.
Jimmy: Yeah, that’s part of becoming a sophisticated investor. I think everybody who accrues a certain amount of net worth goes through this process over time, unless they inherit it, like that. But most people, traditional route, you build it over time, you kind of learn along the way, and eventually you hit the point where you’re high-net-worth or ultra-high-net-worth. And at that point, you really need to become a lifelong learner, or commit to being a learner about your investments.
Where is your money going? Where can I get a better return, potentially, than a traditional 60/40 portfolio? It’s not for everyone, but if you are truly interested in having passive income, growing your net worth, growing your wealth, having your wealth become generational, being able to leave a legacy, with alternative investment strategies, you really need to be able to be educated on it. You need to commit yourself to learning along the way, being a self-educated learner, because your financial advisor might know a lot about stocks and bonds, and might have a little bit of experience here and there with private equity, but he’s not gonna be able to drive you in the right direction oftentimes, and he’s never gonna care about your wealth as much as you.
So, I guess all I’m trying to say is, as you become wealthier, you need to kind of take command of your wealth more so than even your financial advisor, I would say, or at least have some knowledge of all the different areas of investment, as a sophisticated investor.
Steven: I mean, that’s what the successful, most wealthiest people, who have family offices, which essentially is just a fancy term for, they’ve got a team of people that they’ve hired, attorneys, CPAs, investment professionals, all these folks who are on their team, advising them on what are the right strategies in order for them to get where they want to go. They gotta know enough to be able to go out and hire the right people, so you have to have a little bit of knowledge, but then once you have that team, you can feel a lot more comfortable actually tracking the results and seeing that it’s really working.
Jimmy: Yeah. You don’t have to know everything, but you should know enough to be dangerous and to hire the right team, surround yourself with the right people. I think that’s absolutely right. Part of the investor mindset is also your name-your-number process. You mentioned that a few minutes ago. What do you mean by name your number? What is that?
Steven: Yeah. So, when I’m talking about naming your number, what I’m really talking about is getting clear, setting a target, understanding what does it cost for you to live today on your current lifestyle and expenses, and what does it cost to live the lifestyle you wanna live? Your dream life? And so, when you name your number and you get clear on those different stages of what you need to earn, passively, to be truly financially free, that puts you in a position to have that target, to have the ability to track your progress towards that goal, towards that outcome.
And then, the next step, of course, is actually attaching that to that dream life vision that we talked about. And then building a blueprint, building a plan of what types of passive investments you’re going to use in order to get there, and being able to model that out. So, we’ve got an amazing process for helping people figure that out, so that they can make smart decisions so they can understand that when they invest $200,000 today, if it doubles every five years, in 15 years, that $200,000 is gonna be $1.6 million. And if they invest that money at 8%, they’re gonna be making about $10,000 a month.
So, when they can actually back into that plan, back into freedom, it puts them in a position not only to be confident about the decisions they’re making today, but whether they’re investing $200,000 a year or $2 million a year, they can know, well, where is that gonna bring me? And so, naming your number is really about putting a line in the sand and focusing on one single target about what you’re going for, and then building a plan to get there.
Jimmy: Hmm. So, we’ve talked about the mindset, the foundation, really, that you need to have. Talked about name your number. Let’s talk strategy, or tactics now. What are some of the best asset classes, in your mind, for achieving this, for investing for passive income to grow your wealth?
Steven: Yeah. So, we talk a lot about this on “The Investor Mindset Podcast,” and if you like what we’re talking about, I definitely encourage you guys to listen there as well. But when it comes to the asset classes themselves, it’s gonna play into what’s your plan? What’s your timeline? And what’s your risk profile, and what knowledge do you have about those specific asset classes? So, one of the best asset classes to be invested in long-term, from a risk profile standpoint, is multi-family real estate.
When I’m saying multi-family, I’m talking about commercial. You know, either a large portfolio with a lot of small buildings that add up to hundreds of units, or large buildings that are 100 to 300-unit buildings. The benefit of multi-family is that there’s a huge lack of housing in the U.S. There’s a huge need for more of it. And the government creates a lot of incentives from a tax perspective, as well as a lending perspective, to be owning those assets.
It’s a little bit more challenging today than it was two years ago to go and buy these kind of assets, because the cost of debt has gone up. This interview is being recorded May of 2023. But even with that, when you’re, either yourself have the expertise to go out and be an expert, and have that insider knowledge to go find those deals, or you’re working with the right team who has those relationships, that network and the net worth that they can leverage to go and buy deals, we’re still finding amazing opportunities today. So, multi-family is one.
I also love oil and gas. Been working on acquiring an oil and gas firm for the last year. Been looking at oil and gas for the last two years. Been very diligent about understanding what’s going on within that asset class. One of the biggest benefits is that when paired with real estate, especially redevelopment real estate, what’s nice about oil and gas is that it creates a big return quickly. It allows you to write off W-2 income. You know, typically, you’re getting 70% to 80%, maybe even 100% return of your original investment as a loss against your W-2 income, so that’s huge.
But then the other benefit, the other thing I like about it, is that it really is producing some pretty strong cash flow. Those distributions are much more significant than you’re gonna find in real estate. The risk that comes with it is it’s a commodity. So, the commodity price moves up and down. And so when an operator is underwriting a deal in oil, they have to look at, well, what’s the worst-case scenario where I think oil’s gonna be? Where is it at today? What’s the best-case scenario? How does that impact the return? And then really underwriting to make sure you can at least create a 20% if not a 30% annualized return in that space.
The third that I really like is debt, is when you can put yourself into a position, either from a preferred equity position, which acts like debt, producing a fixed rate of return, in an equity position, but with a lot of equity behind it, or, true debt, that’s coming in and just offering, you know, a fixed rate of return. That can be great, because you’re not taking the risk from the equity standpoint. You’re also not gonna get as much upside, but you know you’re gonna get that cash flow on a monthly or quarterly basis.
Jimmy: So, preferred equity, or debt, oil and gas. I’ll talk about oil and gas. I wanna hear more about your acquisition in a few minutes here. And then, multi-family is the one you started with. In multi-family, there’s so many different types of multi-family strategies. There’s different ends of the risk-return spectrum there. There’s ground-up development, there’s core, core-plus, value-add. Where do you like to be on that spectrum? Or does that kind of boil down to the needs and time horizons of your client?
Steven: Everything’s from a timing perspective, both the market, and from, you know, what our clients are looking for. We really like redevelopment of existing multi-family. So, finding those 1960s and 1980s assets, that have been owned for 15 or 20 years, that haven’t had rents bumped. You know, oftentimes we’re finding deals where we can bump rents by 30% to 40% just to get to market, let alone that we’re buying them at a deeper discount compared to market as well. So, we love redevelopment because we already have an asset that is producing cash, and we can come in and be able to juice those returns.
We like that overdevelopment, because it’s a lower risk profile, but we’re creating a similar return, you know, 18% to 20% IRR or higher, 20% to 30% average annual returns, or higher. But we do like development. You know, we started off in single-family. The downside of single-family is that it takes a lot of management effort across that portfolio. The benefit is people stay in those units longer. But what we really like today is build-to-rent. When you can find a great development, you can either buy it after it’s already been entitled, or you can come into the investment after it’s been entitled, you reduce a lot of risk, but you also give up some of that upside, but then you operate those build-to-rent communities similar to a multi-family community, so there’s a lot of that efficiency that’s really beneficial.
But, in real estate, there’s a lot of great asset classes, so I won’t tell you that multi-family is the only one. But what I will tell you is that people always are gonna need a place to live, and as long as you’re investing in the right markets, that have good, strong population growth, and have a lack of units in that specific class that you’re buying, then you can really hedge yourself against risk that might come down the pipeline from an economic standpoint.
Jimmy: And there’s an undersupply of housing, as you mentioned, all across the country. Some markets are impacted more than others, and we’ve talked about that quite a bit on this podcast over the last, I don’t know how many dozens of episodes, we… It seems like the housing shortages has come up several times over the years. So, yeah, it’s the most popular asset class for Opportunity Zone investing, which is the topic that I usually cover, but it’s a very popular asset class outside of Opportunity Zones as well. And you offer a lot of these types of deals on your platform, VonFinch Capital. Tell me a little bit more about that firm. When did you start it? Why did you start it? And who are your investors there, typically?
Steven: Yeah, VonFinch Capital was started back in 2016. Been operating for nearly a decade. And what we’re really focused on is being able to go find incredible investment opportunities in a variety of asset classes, package those opportunities up as the investment sponsor, and oftentimes as the operator, and present those to investors who are investing checks as small as $100,000, or as large as $2 million, $3 million, $4 million, $5 million, even $10 million.
So, about 5% to 10% of our investor base is very large, successful, you know, very wealthy, high-net-worth family office investors. And about 80% to 90% of the people we focus on are kind of everyday investors. They’re the people with, you know, a million or a couple million dollars net worth. They’re investing a couple hundred thousand to half a million dollars a year, and they’re doing it consistently. And the reason that people like working with us is because we’re a boutique firm. You have access to, you know, management, from top to bottom. We’ve got great systems in place for communication. We’re able to find deals that just, other people don’t.
There’s a lot of new funds and syndicators out there who don’t really know what they’re doing. So you alleviate, investing with us, you alleviate that type of a problem. Yet, we’re not a Blackstone. So, we’ve got a heart. We’re focused on doing impact investing. I mean, we’re donating a portion of our profit towards making impact in the community. Doesn’t come out of your check, but you know that when you invest with us, you know, we’re gonna really help make a difference not only for your portfolio, but also for the community at large.
Jimmy: Now, tell me about the oil and gas operator that you’re acquiring, because you’ve traditionally done just pretty plain-vanilla real estate, is that right? And now you’re making a foray into the oil and gas sector. Tell me about that.
Steven: Yeah. So, about two years ago, I was approached by a group out here in Denver who was interested in partnering to put together an opportunity in the oil and gas space. We got really deep into it. We spent a lot of time, and then that individual had a change of heart on what they wanted to do and why they wanted to do it, right? They got more clear on that dream life vision, and taking on the responsibility of launching another fund wasn’t something they wanted to do. But it had opened my eyes to oil and gas. One of the things that’s really interesting about oil and gas is that oil, and natural gas in particular, is such a core piece of our economy.
Whether you like it or not, we are gonna continue to need oil and gas for the next 50 to 100 years, no less. It’s in almost every product that we put out, from plastic to clothing, runs our cars, it heats our houses. It’s absolutely a core need. And so, we like investing in things that have a core need, that have more of a recession-resistant type of positioning, because, even if the market crashes, oil is a commodity, so it goes up and down, but there’s ways that we can hedge effectively.
But what we like about it is that there’s a lot of different ways to play in the space. We’re actually in the process of acquiring a couple companies. So, one of them actually takes natural gas that’s currently being flared into the environment. It’s just being burned off into the environment. It’s essentially being wasted. It’s a byproduct of drilling. We’re able to actually turn that natural gas into electricity, and use that electricity to run server farms, or to mine Bitcoin, or to charge batteries that end up being used for other purposes, all of which are very profitable at about a tenth of the price of where natural gas is today. And we’re typically buying it below that price.
So, what that means is we’re essentially taking something that’s a waste, and is a negative impact on the environment, and we’re actually turning that into a commodity that we can sell, whatever that might be, whether it fits into any of those, kind of, three categories.
On the other side of the equation, what we like about is you can buy existing wells that are already operating, that you can come in and do what we call value-add to, where you come in and you’re able to either A, re-drill a well, or turn a well from vertical to horizontal, or you’re able to simply just fix some of the mechanical issues and be able to produce more production, thereby buying it at today’s price, but be able to increase production by 20% to 30% or 40%. So, you create big value. But the final, and the biggest piece that I really love is when you’re actually drilling new wells, whether it’s oil or it’s gas, both of them have big benefits. You can also pull helium outta the ground. There’s big benefits in that space as well. It’s all kind of under that kind of natural resources, energy flag.
But when you’re drilling new wells, you actually can write off 100% of the costs of those wells that are being drilled against earned income. So, W-2 income, income that’s earned in your business that you’re normally paying earned income tax on. So, not only are you gonna get a huge savings, imagine if you’ve got a million-dollar-a-year net income that you’re gonna pay taxes on, you’re paying at the highest rate. That’s a huge savings on taxes, but then the returns are typically quite, quite good.
You know, when we’re underwriting a deal, it’s typically 20% to 30% average annual return over a five-year hold. So, within the first one to two years, you’re getting most if not all of your investment back, if it’s anything above and better than that. But then the other big benefit is it produces great cash flow. The dividends are super strong. I know people are living off of those dividends for a very long time, because once you tap into that oil, as long as you’ve got the right type of well, you’re gonna create a great ROI across the board. So, there’s a lot of good things about oil and gas. There’s a lot of different ways to play in that space, and we’re quite bullish on that opportunity and what it’s gonna look like for us, and for all of our investors who invest alongside us.
Jimmy: Yeah, some great opportunity for some passive cash flow for your LPs there. What is that called? The ability to write off the W-2 income? Is it depletion allowance or something like that? My memory’s a little bit fuzzy. I don’t focus on oil and gas too much, but what is that exactly?
Steven: Yeah. So, they call it IDCs, is the acronym for it. But what it really comes down to is depletion. So, every single year that you pull out oil from that well, like depreciation on a real estate deal, you’re getting depletion on the well, because unlike real estate, which appreciates over time, oil and gas, you’re pulling out that oil, and technically, at the end of the life of that well, whether it’s 10 years, whether it’s 100 years, you’re going to be in a position where there’s no more oil, and that well is worthless. And so they allow you to write off the depletion every single year, thereby reducing your tax burden. But when you’re actually drilling the well, by doing the drilling, and investing the money into the drilling itself, you get 100% of that back.
Typically, investors see somewhere in the 60% to 80% range, because it depends on how much the land is that you’re buying. For example, if you’re buying land in Texas in the Permian Basin, you can’t get into a deal there for less than $50 or $100 million dollars. And the land is very expensive because the oil is really, really high-grade, and there’s a lot of people who want it. If you’re investing in Wyoming or New Mexico or some of these other markets, you can buy land much cheaper, but maybe you don’t have the same production. And so there’s a trade-off, and that’s where it really comes down to the strategy of oil and gas. It’s not necessarily important to be in the hottest, most sexiest place. It’s really about how do you find land that is well-valued in comparison with what do you pull out.
Jimmy: Great stuff. I love a little bit of oil and gas talk here. We’ve had a couple of episodes we talked to oil and gas, but always good to get a reminder there about the great opportunity there. What about the current macroeconomic environment, Steven? It’s been a little bit volatile lately. Maybe we’re headed into a recession. It seems like they’re trying to plunge us into one to combat inflation. We did have slower GDP growth than the numbers that were just released. I think the Fed’s actually meeting right now to decide what they’re gonna do with interest rates.
Looks like maybe it’s a quarter-point hike. Don’t hold me to that. I think it’s happening right now, while we’re recording this. So, I haven’t checked yet, but all of that, some investor uncertainty, some volatility in the markets, huge increase in the cost of debt, with inflation. Does that current macroeconomic environment impact your strategy at all, or what you’re advising your clients to do with their net worth?
Steven: Yeah, everything that’s around investing is connected directly back to the economy and the current environment that we’re in. So, for example, in 2020, we had one strategy, in 2021, our strategy shifted. As of 2023 and interest rates going up at the fastest rate in the last 20 or 30 years, it has changed our strategy. It’s made it more difficult to buy properties today, because interest rates are significantly higher, and the sellers are still thinking, hey, I want to sell for what it was worth last year. And the buyers are saying, if it gets worse, I wanna buy it for what it’s gonna be worth in two years, right?
So, there’s a big separation between buyers and sellers. And so our strategy shifted in the sense that we’re heavily focused on finding where there’s that inefficiency in the market. We were buying 200 to 300-unit buildings two years ago. Right now, we’re actually finding a huge opportunity in Denver, where we’re seeing deals in from 2015 to 2019 pricing in that 20 to 100-unit multi-family range, right here in Denver, where I’m located, where our office is. The reason we’re liking that is because we’re able to buy these deals at a great price. We’re often able to negotiate financing terms between 2% and 4% from the seller, because they’re in distress.
And oftentimes, we’re the only buyer at the table because of our track record, and they know we can get the deal done. So we’re actually telling them what we’re gonna buy it for, and negotiating that kind of a deal. So, is it more work for us to buy smaller units? Yes. It’s so much more work, but it’s worth it, in our eyes, because, as long as we can keep deploying capital, and we can deploy capital hedging against whatever kind of downturn we might face… I don’t have a crystal ball, so I can’t know whether the Fed is gonna continue to raise rates after this hike. They did just raise it by 25 basis points.
Or, whether we’re gonna see some kind of big recession. Likely, it’s gonna happen. Fortunately, most of what’s happening in the economy is not tied directly into, you know, real estate or oil as the driving factor or force. So, it’s gonna impact us, but when we’re underwriting deals, we’re looking at, okay, well, where is things gonna be in a year, in two years, in three years? What’s our exit timeline? Cool. We wanna exit in three years? Let’s plan a five-year investment time period, so that we have a little bit of buffer to change and adapt. And then also, the final thing is, let’s set a lower expectation on returns with investors, so that if the economy goes in that direction, we’ve got some buffer to be able to make up for it and over-deliver, and if it does better than what we’re projecting, then everyone’s gonna be happy. Because no one is mad when you deliver a better rate of return, but definitely, people aren’t as happy even if you’re just a point or two off.
Jimmy: That’s for sure. Well, what is the future gonna bring, Steven? Let me ask you to look into your crystal ball here for a minute, if you wouldn’t mind. What are some trends across, we’ll just focus on the private equity real estate landscape right now. What are some trends you have an eye on over the next couple years? What do you think’s gonna play out over the next couple of years here?
Steven: Yeah, office, commercial office is gonna tank huge, especially in those markets where people have left, like San Francisco and some of these other markets, that weren’t friendly during the pandemic, or had very, very high cost of office. So, I think office is gonna get annihilated. It’s probably gonna take a government program to convert those office spaces into residential living in order for that to be profitable or make sense, unless people are just buying these buildings at such low costs. I think multi-family is gonna have a little period of slower growth. You know, last year we saw 16% to 18% rent growth in Denver. This year we’re projecting maybe 6% to 7%.
And in our underwriting, we’re projecting maybe a 3% growth. So, what we’re expecting and projecting is that, you know, things are gonna maybe get a little bit worse before they get better. But, at the core of it, from an investing perspective, the opportunity is to go and find the right people to invest with, the people with funds that are accumulating a lot of money, that can go in and make ridiculous offers and get them accepted, like we’re doing right now, and be able to then turn that into great returns no matter where the economy goes.
Jimmy: Tremendous. Well, Steven, it’s been a pleasure speaking with you today. Really enjoyed our time and getting to learn a little bit more about you and the investor mindset, and your investment strategy. Thanks for sharing all of your insights. Before we go, where can our audience of high-net-worth investors go to learn more about you and VonFinch Capital, and how can they check out your podcast, “The Investor Mindset Podcast?”
Steven: Yeah, well, you can head to vonfinch.com to check out more about our firm. If you want to invest, you can register and schedule a call with a member of our advisory team to find out more about us, and start building that relationship. Really big on that. If you want to get in touch directly with me, @Steven.Pesavento on Instagram and LinkedIn. Post a lot of great content, and teaching and training. You can follow there. Shoot me a DM on any of those platforms and let me know that you listened here. And if you liked what we talked about, we talk a lot about this on “The Investor Mindset” show, so head over, hit subscribe, and take a listen.
Jimmy: Fantastic. And I’ll make sure to link to all of those links in the show notes for today’s episode, which you can find at opportunitydb.com/podcast. And please also be sure to subscribe to us on YouTube or your favorite podcast listening platform to always get the latest episode. Steven, again, thank you so much today. It’s been a pleasure.
Steven: It’s been a pleasure.